As Sue drove to the mediation session, she stared at the stack of bank statements in the passenger seat. “How will I ever understand these? I don’t know anything about money. How can I protect myself?”
Property discussions represent some of the most stressful moments in divorce. In some couples, one spouse has much greater financial understanding than the other. Leaving the other spouse feeling vulnerable and lost. Far more often, neither spouse understands money well. And both feel vulnerable.
A little preparation makes all the difference. Before making property decisions. each person needs to understand:
- their budget,
- their assets,
- their debts,
- their options for settling marital property, and
- the consequences of each option.
In Indiana, “marital property” includes anything each spouse brought into the marriage and anything accumulated during the marriage, both assets and debts. While there is a presumption these will be split equally, courts can use a variety of circumstances to change that presumption. In mediation, there is even greater flexibility in using marital resources to ensure financial viability for both.
Before any discussion, each person should prepare a detailed budget of all living expenses for their post-divorce home. The more detailed the budget, the more realistic a picture each person will have about their needs. The couple can then determine how to use their assets to create financial stability for both.
Individuals should then compile a complete listing of assets. Typical assets include:
- The house. Often a couple’s biggest asset, the budget helps couples determine whether either can keep the house. If it must be sold, the equity becomes a liquid asset couples can use to pay outstanding debt, to use as down-payments on other residences, or to fund retirement plans.
- Other real estate. Vacation homes, rental properties, or even undeveloped land should also be valued and the values considered in the overall financial picture.
- Retirement plans. Generally the second greatest asset, retirement plans often help create security, especially when there is a significant disparity in spousal income. Retirement plans are considered marital property after they are vested.
–401K/403B: to split a 401K or 403B, the covered spouse will need to have an attorney prepare a Qualified Domestic Relations Order (QDRO) which is an order the Court issues to the account’s administrator telling how to divide the account.
Distributions to the other spouse are often rolled into another account. If rolled into another 401K account, the receiving spouse can continue withdrawing money after rollover without penalty. These funds can be used for the down-payment on a house, to pay off debt, or to subsidize living expenses. If rolled into an IRA, any amounts subsequently withdrawn from the IRA will be subject to both income tax and penalty, unless the receiving spouse is qualified to make a withdrawal.
–IRA: No QDRO is needed to divide an IRA. The owner can simply transfer the amount owed the receiving spouse, without penalty. Any proceeds used by the receiving spouse will incur both a penalty and income tax unless certain conditions are met.
–Pensions: The amount of pension vested at the time of divorce is considered marital property. Couples can choose to ascertain a present value of the pension and account for this amount in the division of assets at divorce. Or, they can designate a percentage division to be applied to each payment when the pension is paid at retirement.
- Bank Accounts. All bank accounts should be valued as of the date of separation. Any major deposits/withdrawals used to facilitate the divorce process should also be considered.
- Family Businesses. Often the most difficult asset to consider, valuations can run into tens of thousands of dollars. More, while a business’s value may be high, the liquid assets to compensate a spouse are often much lower. Couples will need to be flexible and creative when considering this asset.
- Other Assets. Other assets can include trusts, investments (stocks, bonds, mutual funds, certificates of deposit), cash value in whole life insurance policies, collections, or major pieces of furniture/jewelry. Some of these assets might most naturally flow to one spouse or the other. For example, a trust set up for one spouse with present value might be credited to that spouse. But, the value would be balanced by assets going to the other spouse.
Like assets, marital property includes all debts brought into the marriage as well as those incurred during the marriage. For many couples, the debts exceed the assets, which complicates decision-making.
The budgets prove crucial to finding options for paying debts. Couples must also be willing to see how the assets they have accumulated can be creatively used to pay debt. Debts often include:
- Mortgage/s on the marital home
- Car loans
- Credit card debt
- Student loans
- Family loans
- Back taxes
One of the more difficult decisions in divorce is whether to sell the marital home. Couples often need equity to pay debt and give each spouse a fresh start. Yet, parents worry about forcing children to leave their home. Children actually do much better in a new home with a secure parent than in their old home with a debt-ridden, stressed parent.
Debt consolidation services also offer options for couples to gain debt relief and payment plans that fit new budgets.
Finally, some couples find bankruptcy their only option. Because divorce laws and bankruptcy laws are closely intertwined, it is critical for couples to consult attorneys in both areas to create the right order and timing to gain true relief.
Because financial issues are complex, seeking professional help in divorce helps ensure couples make the best decisions. More, property settlements, once filed with the Court, cannot be reopened. So, each person needs to thoroughly understand the consequences of all their options before signing an agreement.
If you would like assistance understanding the financial issues of divorce, please call The Resolution Center at 317-344-9740 or email info@TheResolutionCenterIndy.com. We look forward to serving you.